How stronger patent protection in India might affect the behavior of transnational pharaceutical industries

To address questions about how stronger patent rights will affect India's pharmaceutical industry, the author simulates the effects of introducing such protection - as required by the World trade Organization Agreement on Trade-Related Intellectual Property Rights (TRIPs) - on market structure and static consumer welfare. (India must amend its current patent regime by 2005 and establish a transitional regime in the meanwhile.) The mode the author uses accounts for the complex demand structure for pharmaceutical goods. Consumers can choose among various drugs available to treat a specific disease. And for each drug, they have a choice among various differentiated brands. The author calibrates the model for two groups of drugs - quinolonnes and synthetic hypotensives - using 1992 brad-level data. In both groups, a subset of all available drugs was patent-protected in Western Europe but no India, where Indian manufacturers freely imitated them. The simulation analysis asks how the market structure for the two groups of drugs would have looked if India had granted patents for drugs. It does not take account of the fact that stronger patent protection will not apply to existing drugs and that the Indian government might be able to restrain high drug prices by imposing price controls or granting compulsory licenses. Still, the author concludes that if future drug discoveries are mainly new varieties of already existing therapeutic treatments, the effect of stronger patent protection is likely to be small, If newly discovered drugs are medicinal breakthroughs, however, prices may rise significantly above competitive levels and static welfare losses may be large. If demand is highly price-elastic, as is likely in India, profits for transnational corporations are likely to be small, but if private health insurance is permitted in India, reducing the price-sensitivity of demand, patent-holders'profits could increase substantially. In light of the fact that the TRIPS Agreement strengthens patent rights in most developing countries, pharmaceutical companies may do more research on, for example, tropical diseases.